Wells Fargo & Company (WFC) reported first quarter 2011 earnings of 67 cents per share on April 20 that was in line with the Zacks Consensus Estimate. Quarterly results reflect a decent reserve release and a decrease in expenses, offset by revenue downturns.
The market had sufficient time to absorb the earnings news following its release. The majority of analysts covering Wells Fargo have made downward revisions. The top line remains a matter of concern at the company.
Earnings Report Review
Wells Fargo’s first quarter 2011 earnings of 67 cents per share were in line with the Zacks Consensus Estimate but significantly higher than earnings of 45 cents in the year-ago quarter and 61 cents in the prior quarter.
Wells Fargo reported reserve release of $1.0 billion (pre tax) attributable to improved portfolio performance. Expenses also dropped from the year-ago quarter. However, the positives were offset by lower-than-expected revenue.
Revenues came in at $20.3 billion, down 5% from the prior quarter and also below the Zacks Consensus Estimate of $21.3 billion, reflecting lower mortgage banking revenue and net interest income.
(Our full coverage on the earnings is available at: Wells Fargo Reports In Line)
Agreement of Estimate Revisions
A company reporting earnings in line with expectations is not discouraging but failed to create enough excitement among the analysts due to the lower-than-expected revenue figure.
Of the 26 analysts covering the stock, 11 have lowered their estimates for the upcoming quarter while only 3 have moved in the opposite direction. For full-year 2011, 11 analysts have revised their estimates in the southward direction while only five have moved north. Additionally for full-year 2012, 15 analysts have reduced their estimates while only 3 moved up. Clearly, the analysts predict dull full year 2011 and 2012.
The primary reason for this downward revision in EPS estimates seems to be concerns over Wells Fargo’s top line. While the Wachovia acquisition and the demise of some smaller players helped it garner a larger share in the mortgage markets, economic headwinds are responsible for the revenue slump. Lower assumptions for loan growth and restricted scope for margin expansion in the current environment remains a challenge for Wells Fargo.
Magnitude of Estimate Revisions
Looking at the magnitude of estimate revisions we find that the full-year 2011 estimate has moved down by 7 cents to $2.79 per share. For full-year 2012, the estimate moved southward by 12 cents to $3.48 per share in the last 30 days.
Holding Wells Fargo Still Worthwhile
It becomes quite evident from the estimate revision trend that Wells Fargo’s outlook looks subdued in the current economic environment. Yet, its diverse geographic and business mix positions it relatively well.
Wells Fargo’s Wachovia merger integration remained on track and in March. The company also announced a special first quarter 2011 cash dividend of 7 cents per share on its common stock. Combined with a quarterly dividend of 5 cents per share declared in January 2011, the special dividend brought the total dividend to 12 cents. The increased dividend was paid on March 31 to shareholders of record on March 28.
The board also augmented Wells Fargo’s share repurchase by an additional 200 million. The quarterly dividend rate increase to 12 cents per share was part of the capital plan the company submitted to the Federal Reserve Board in January 2011.
The other Wall Street biggies who have similarly submitted capital plans to the board and got approval from the Fed for dividend raise and share buyback include JPMorgan Chase & Co.(JPM), U.S. Bancorp (USB) and PNC Financial Services Group Inc. (PNC). These banks needed to show that they will have adequate capital to address potential losses over the next two years, even under adverse scenarios.
While the regulatory issues remain a concern for Wells Fargo, we believe that leverage from expense control initiatives, lower integrations expenses and balance sheet strength would help the company navigate the current challenging environment. Additionally, with improving economic conditions, a promising credit quality outlook and a strong business model, Wells Fargo has strong potential for earnings growth. The capital deployment initiatives further inspire investors’ confidence in the stock.
Wells Fargo shares retain a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are maintaining a long-term Neutral recommendation on the stock.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
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